Mikro MSC Berhad (KLSE:MIKROMB) shareholders have had their patience rewarded with a 29% share price jump in the last month. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.
Since its price has surged higher, Mikro MSC Berhad's price-to-earnings (or "P/E") ratio of 16.1x might make it look like a sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 12x and even P/E's below 7x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Mikro MSC Berhad certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Mikro MSC Berhad will help you shine a light on its historical performance.
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Mikro MSC Berhad's is when the company's growth is on track to outshine the market.
If we review the last year of earnings growth, the company posted a terrific increase of 88%. The latest three year period has also seen an excellent 35% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.2% shows it's about the same on an annualised basis.
With this information, we find it interesting that Mikro MSC Berhad is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
What We Can Learn From Mikro MSC Berhad's P/E?
Mikro MSC Berhad shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Mikro MSC Berhad revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
It is also worth noting that we have found 3 warning signs for Mikro MSC Berhad (1 can't be ignored!) that you need to take into consideration.
Of course, you might also be able to find a better stock than Mikro MSC Berhad. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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